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Your Answer to Skyrocketing Health Costs

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Tired of paying through the nose for health insurance you never use? As dumb as it may seem to throw good money after bad, going entirely without health insurance is a risky move, potentially leaving you one serious accident away from bankruptcy. But one insurance option that's growing in popularity is worth a closer look, especially if you have some money in the bank and don't tend to have a lot of medical expenses.

Time for some alphabet soup
First, get ready for a bunch of confusing acronyms. Health savings accounts, or HSAs, are tax-favored vehicles that let you set aside money for medical expenses. The easiest thing to do is to think of HSAs as IRAs for health care, because they're similar in several ways.

But before you can open an HSA, you need to have what's known as a high-deductible health plan or HDHP. HDHPs and HSAs always go together, but they're different things that you typically have to establish separately.

As their name suggests, HDHPs allow you to have a higher deductible on your health insurance than most traditional plans offer. If you've ever bought auto or homeowners insurance, you've probably noticed that if you choose a higher deductible on your policy, you can cut your premiums significantly.

The same principle applies to HDHPs. Instead of providing coverage for all your medical expenses, HDHP insurance only kicks in after you pay a fairly large deductible: $1,200 for single coverage and $2,400 for family coverage. After you pay that much, HDHPs work like regular health insurance policies. Many employers offer HDHPs in their benefits packages, and Aetna (NYSE: AET  ) , UnitedHealth Group (NYSE: UNH  ) , and Humana (NYSE: HUM  ) are among the insurance companies that offer them to customers.

If you have an HDHP, you can open an HSA. Some insurance companies offer HSAs and HDHPs in one package, but you don't have to combine them. Instead, you can go directly to financial institutions to open HSAs, including US Bancorp (NYSE: USB  ) , Bank of America (NYSE: BAC  ) , and Wells Fargo (NYSE: WFC  ) .

Using your HSA
Once you have an HSA, you need to make contributions to it. In 2010, singles can contribute up to $3,050, while families can put $6,150 into an HSA. Contributions bring two benefits: You get a tax deduction for the amount you put into the HSA, and as long as you use the money for qualifying medical expenses, you can take it out tax-free and avoid tax on any income your HSA earns.

Once you have an HSA, using it is easy. Many HSAs offer checks or debit cards that let you immediately pay for medical expenses directly from your account. Alternatively, you can just pay your doctor out of pocket and reimburse yourself from your HSA at a later date.

That way of doing things may sound familiar if you've ever used a flexible spending account at work. The advantage of HSAs, though, is that unlike flex plans, you don't have to spend your HSA money by the end of the year. Any unused money carries over to future years.

Endangered no more
Before the health-care reform law passed, some believed that HSAs would fade into the sunset. But although the law reduced the amount that workers could set aside in flex plans, it didn't change the HSA provisions.

As with any choice of benefits, HSAs come with an inherent trade-off: You pay less in premiums in the hope that you won't incur major medical expenses. If you actually end up having to pay that high deductible amount, you could come out worse off even after taking lower monthly premiums and the tax savings from HSA contributions into account.

Another shortfall of HSAs is that like 401(k) plans, you can't simply invest in whatever you want. Each institution's HSA comes with fixed investment options, and although you can find mutual funds and other choices linked to stocks, they often come with hefty fees. However, some employers actually add contributions to an employee's HSA, making the plan an even better option.

Keeping open the HSA/HDHP combo as a possibility can make a lot of sense, especially if you're healthy and have the money to make contributions. With lower premium costs, the tax benefits are simply icing on the cake.

Health care is a lucrative industry even after reform. Click here to read the Motley Fool's free report on the risky health-care company Warren Buffett is secretly buying .

Tune in every Monday and Wednesday for Dan's columns on retirement, investing, and personal finance.

Fool contributor Dan Caplinger thinks a 25% increase in annual premiums is ridiculous. He doesn't own shares of the companies mentioned in this article. Motley Fool Options has recommended a diagonal call position on UnitedHealth Group, which is a Motley Fool Inside Value recommendation and a Motley Fool Stock Advisor pick. The Fool owns shares of UnitedHealth Group. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool's disclosure policy glows in the rockets' red glare.


Read/Post Comments (3) | Recommend This Article (5)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On November 03, 2010, at 11:02 AM, SandyRN wrote:

    I wish the "large" deductible was only $1200 for an individual. My employers premium Blue Cross had that deductible per year. Now that I'm unemployed, our high deductible insurance has a deductible of over $7,000 per person. When I was shopping for low cost plans I even ran into plans that had $20,000 to $30,000 per year family deductibles.

  • Report this Comment On November 04, 2010, at 11:15 AM, FeeNahNay wrote:

    Premiums in Florida are about the same for high deductible plans with about the same out-of-pocket costs. Much higher deductibles probably have lower premiums. The big benefit to having even a super-high deductible is the carrier's rates for medical services are usually lower than the prices for uninsured people.

  • Report this Comment On November 05, 2010, at 8:41 PM, ChrisFs wrote:

    While they may have their place,

    high deductible plans are only good for those who are healthy to begin with (i.e don't need to spend much) and can afford to fund an HSA to cover the deductible.

    It's also been found that when people have to pay the full price for preventative care, they are less likely to get it and are likely to need more expensive care in the long run, which is bad for the person, and the insurer.

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Dan Caplinger
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Dan Caplinger has been a contract writer for the Motley Fool since 2006. As the Fool's Director of Investment Planning, Dan oversees much of the personal-finance and investment-planning content published daily on Fool.com. With a background as an estate-planning attorney and independent financial consultant, Dan's articles are based on more than 20 years of experience from all angles of the financial world.

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